A ‘New Contract with America’

OPINION:

Three decades ago, Newt Gingrich and a Republican Congress drafted the ‘Contract with America’. The end of the cold war was an important turning point in U.S. fiscal policy. The statutory fiscal rules in the ‘Contract with America’ were designed to promote economic stability and promote economic growth. The rules require a balanced budget and debt stabilization.

For several years Congress fulfilled these commitments, and by the end of that decade the budget was in fact balanced. This was a bipartisan effort in Congress and was supported by President Clinton. In the ‘Contract with America’ elected officials placed the prosperity of the nation above partisan politics.

Today, the ‘Contract with America’ is broken, for three decades Congress has failed to fulfill these commitments. They have incurred deficits and accumulated debt at an unsustainable rate. The statutory fiscal rules have been routinely circumvented and suspended. In their Long-Term Forecast, the Congressional Budget Office projects that the federal government will continue to incur deficits and accumulate debt at a rate that is not sustainable. The CBO also concludes that at some point the U.S. is likely to experience a fiscal crisis that ends this fiscal profligacy.

In contrast to the United States, some European countries have successfully addressed their debt crises and restored economic stability and economic growth. They have enacted new fiscal rules at both the national and supranational level that have proven to be effective in balancing their budgets and restoring debt sustainability. The U.S. needs a ‘New Contract with America’. Citizens can no longer wait for Congress to fulfill the commitments in the ‘Contract with America’. A ‘New Contract with America’ requires Constitutional fiscal rules and shock therapy.

The most effective of the new fiscal rules, such as those in Switzerland, are constitutional rules, enacted through direct democracy. The Swiss ‘debt brake’ is a constitutional fiscal rule enacted through a referendum with support from 85% of the electorate. The ‘debt brake’ requires the federal government to bring expenditures into balance with revenues in the short term. The budget must be balanced over the business cycle using a rainy-day fund to offset deficits with revenue from the general fund. Most importantly, the ‘debt brake’ caps the rate of growth in federal expenditures at the long-term rate of growth in the economy.

The U.S. must now enact fiscal rules like the Swiss ‘debt brake’, and this will prove to be challenging. If the U.S. had enacted a ‘debt brake’ three decades ago, as the Swiss did, Congress could have allowed for a transition period of several years to bring federal expenditures into balance with revenues and allowing the economy to adjust to these more stringent fiscal rules. Unfortunately, the U.S. now requires ‘shock therapy’ to avoid a fiscal crisis.

Shock therapy requires an immediate freeze on discretionary federal spending to bring expenditures into balance with revenues. The freeze must apply to all discretionary spending, including defense spending. In the long term an end to military conflict should be accompanied by a reduction in defense spending comparable to that following the end of the ‘Cold War’.

The original ‘Contract with America’ was successful in the 1990s, in part, because a peace dividend allowed Congress to significantly reduced military spending. Defense spending as a share of gross national product was reduced from 3.6 percent in 1995 to 2.9 percent in 2000. A ‘New Contract with America’ should anticipate an end to the current military conflict and a peace dividend that will allow for a similar reduction in defense spending.

A more difficult challenge will be reducing non-discretionary spending. Freezing discretionary spending should set the stage for fundamental reform of entitlement programs. European countries have also set the precedent for entitlement reform. For example, Switzerland designed a separate set of rules for pensions requiring automatic adjustments in benefit payments and contribution rates necessary for long-run actuarial balance. Swiss citizen found that with these fiscal rules in place the country could begin to address long term challenges, such as an aging population and increased demands for pension and health benefits.

Critics will argue that the proposed ‘New Contact with America’ is unrealistic and aspirational. They will argue that shock therapy is destabilizing and could even lead to another Great Depression. Similar dire predictions were made when the U.S. downsized the federal government after World War Two. In fact, after a brief recession, the downsizing of the federal government after World War Two launched the longest period of economic growth in the nation’s history. A new peace dividend could allow for a similar downsizing of government, and the market economy has proven to be remarkably resilient to such a structural change.

However, critics are right in questioning whether Congress would approve a ‘New Contract with America,’ and the fiscal discipline required by the new fiscal rules. Citizens can no longer wait for Congress, they must follow the precedent set in Switzerland and enact the new fiscal rules as constitutional amendments.

While U.S. citizens do not have the right of initiative and referendum at the federal level, The First Amendment to the U.S. Constitution gives citizens the right to petition government. In fact, citizens have used this petition right to enact both the 19th Amendment granting women suffrage, and the 21st Amendment repealing prohibition. A new revolution is now underway strengthening the right of U.S. citizens to petition their government and amend the Constitution.

Barry W. Poulson is professor emeritus at the University of Colorado, Boulder Colorado, and on the Board of the Prosperity for US Foundation. William Owens is a former vice chairman of the Joint Chiefs of Staff. He is on the Board of the Prosperity for US Foundation